ANDREA ELECTRONICS CORPORATION Overview
We design, develop and manufacture state-of-the-art digital microphone products and noise reduction software that facilitate natural language, human/machine interfaces. Our technologies eliminate unwanted background noise to enable the optimum performance of various speech-based and audio applications. We are incorporated under the laws of theState of New York and have been engaged in the electronic communications industry since 1934. Our patented and patent-pending digital noise canceling technologies enable a speaker to be at a distance from the microphone (we refer to this capability as "far-field" microphone use), and free the speaker from having to use a close talking microphone. We believe that the strength of our intellectual property rights are important to the success of our business. We utilize patent and trade secret protection, confidentiality agreements with customers and partners, disclosure and invention assignment agreements with employees and consultants and other contractual provisions to protect our intellectual property and other proprietary information. As part of our Patent Monetization efforts, we license specific, custom designs to our customers, charging royalties at a fixed amount per product or a percentage of sales, and we intend to vigorously defend and monetize our intellectual property through licensing arrangements and, where necessary, enforcement actions against those entities using our patented solutions in their products.
Our Critical Accounting Policies
Our unaudited condensed consolidated interim financial statements and the notes to our unaudited condensed consolidated interim financial statements contain information that is pertinent to management's discussion and analysis. The preparation of unaudited condensed consolidated interim financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on
various other
17
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our significant accounting policies are described in Note 2 of the notes to the audited financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . A discussion of our critical accounting policies and estimates are also included in Note 2. Summary of Significant Accounting Policies in notes to consolidated interim financial statements included elsewhere in this report. Management has discussed the development and selection of these policies with the Audit Committee of the Company's Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company's disclosures of these policies. There have been no material changes to the critical accounting policies or estimates to be disclosed in this Quarterly Report since being reported in the Management's Discussion and Analysis section of the Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:
• our assumptions, estimates and beliefs regarding the possible effects of the
COVID-19 pandemic on general economic conditions, public health and consumer
demand, and the Company's results of operations, liquidity, capital resources
and general performance in the future;
• our ability to obtain financing, including the possible impact of COVID-19 and
the limitations in the Revenue Sharing Agreement;
• our expectations regarding the use of funds from the Company's PPP Loans and
SBA Loan and the potential for forgiveness of the PPP Loan Second Draw under
the terms of the PPP;
• changes in economic, competitive, governmental, technological and other factors
that may affect our business and prospects.
• our limited cash and our history of losses;
• our ability to achieve profitability;
• our ability to continue as a going concern;
• whether we obtain market acceptance and effectively commercialize our products;
• the adequacy of protections afforded to us by the patents that we own and the
cost of maintaining, enforcing and deeding our patents;
• receiving an unfavorable ruling in our current litigation proceedings, which
may adversely affect our business, results of operations and financial
condition;
• our success at managing the risks involved in the foregoing items; and
• other factors discussed in this report and our other filings with the
Additional factors are discussed under "Risk Factors" and in Part I, "Item 1A - Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and under Part II, "Item 1A - Risk Factors" in the Company's quarterly reports on Form 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. 18 Results Of Operations Three and Six Months endedJune 30, 2021 compared to the Three and Six Months endedJune 30, 2020 Total Revenues For the Three Months Ended For the Six Months Ended June 30, % June 30, % 2021 2020 Change 2021 2020 Change Patent Monetization revenues License revenues $ 73$ 163 (55 )$ 157 $ 302 (48 ) Total Patent Monetization revenues 73 163 (55 ) 157 302 (48 ) Andrea DSP Microphone and Audio Software Products revenues Revenue from automotive array microphone products 66,815 40,089 67 146,993 159,665 (8 ) (a) Revenue from OEM array microphone products 273,784 136,206 101 537,608 374,949 43 (b) Revenue from customized digital products 40,510 14,490 180 104,783 31,723 230 (c) All other Andrea DSP Microphone and Audio Software Products revenues 2,779 17,542 (84 ) 17,719 19,745 (10 ) (d) License and service related revenues 6,634 46,825 (86 ) 9,819 51,582 (81 ) (e) Total Andrea DSP Microphone and Audio Software Products revenues 390,522 255,152 52 816,922 637,664 28 Total revenues$ 390,595 $ 255,315 52$ 817,079 $ 637,966 28
(a) The approximate
products for the three months ended
decrease in the six months ended
periods in 2020, is the result of timing of sales to integrators of public
safety and mass transit vehicle solutions.
(b) The approximate
microphone products for the three and six months ended
respectively, as compared to the same periods in 2020, are primarily the
result of timing of sales to integrators of commercial product audio
solutions.
(c) The increases of approximately
products revenue for the three and six months ended
respectively, as compared to the same periods in 2020, are related to the
timing of purchases from an OEM customer for a customized digital product.
(d) The decreases of approximately
Andrea DSP Microphone and Audio Software Products for the three and six
months ended
2020, is primarily the result of decreased revenues from sales to the
market for audio solutions.
(e) The approximate
revenues for the three and six months ended
compared to the same period in 2020, is a result of decreases in service
related revenue for a project that was completed in 2020.
Cost of Product Revenues
Cost of product revenues as a percentage of total revenues for the three months endedJune 30, 2021 and 2020 was 27% and 18%, respectively. Cost of product revenues as a percentage of total revenues for the six months endedJune 30, 2021 and 2020 was 25% and 21%, respectively. There was no cost of product revenues associated with the Patent Monetization revenues of$73 and$157 for the three and six months endedJune 30, 2021 , respectively, nor cost of product revenues associated with the Patent Monetization revenues of$163 and$302 , for the three and six months endedJune 30, 2020 , respectively. The cost of product revenues as a percentage of total revenues for the three months endedJune 30, 2021 for Andrea DSP Microphone and Audio Software Products was 19 27% compared to 18% for the three months endedJune 30, 2020 . The cost of product revenues as a percentage of total revenues for the six months endedJune 30, 2021 for Andrea DSP Microphone and Audio Software Products was 25% compared to 21% for the six months endedJune 30, 2020 . These changes are primarily the result of the increase in product revenues as well as the product mix described in "Total Revenues" above. Patent Monetization Expenses Patent monetization expenses for the three months endedJune 30, 2021 decreased 23% to$38,352 from$49,538 for the three months endedJune 30, 2020 . Patent monetization expenses for the six months endedJune 30, 2021 decreased 13% to$77,524 from$88,928 for the six months endedJune 30, 2020 . These expenses are a result of our continuing efforts to pursue patent monetization including the filing of the complaints disclosed under Part II, Item 1 Legal Proceedings. The decreases in Patent Monetization expenses for the three and six months endedJune 30, 2021 is mainly attributable to the timing of legal services incurred to pursue patent monetization.
Research and Development Expenses
Research and development expenses for the three months endedJune 30, 2021 decreased less than 1% to$146,656 from$147,245 for the three months endedJune 30, 2020 . Research and development expenses for the six months endedJune 30, 2021 decreased 5% to$284,380 from$299,866 for the six months endedJune 30, 2020 . These expenses primarily relate to costs associated with the development of new products. For the three months endedJune 30, 2021 , the increase in research and development expenses reflects a 40% decrease in our Patent Monetization efforts to$3,799 , or 3% of total research and development expenses, and a 1% increase in our Andrea DSP Microphone andAudio Software Technology efforts to$142,857 , or 97% of total research and development expenses. For the six months endedJune 30, 2021 , the decrease in research and development expenses reflects a 36% decrease in our Patent Monetization efforts to$7,558 , or 3% of total research and development expenses, and a 4% decrease in our Andrea DSP Microphone and Audio Software Technology efforts to$276,822 , or 97% of total research and development expenses. The changes in our Patent Monetization efforts represent intangible asset amortization expense while the changes in our Andrea DSP Microphone and Audio Software Technology efforts reflect expenses related to our research efforts primarily focused on the pursuit of commercializing a natural language-driven human/machine interface by developing optimal far-field microphone solutions for various voice-driven interfaces, incorporating Andrea's digital super directional array microphone technology, and certain other related technologies such as noise suppression and stereo acoustic echo cancellation. We believe that continued research and development spending should benefit Andrea in the future.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased approximately 4% to$248,617 for the three months endedJune 30, 2021 from$238,033 for the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 , general, administrative and selling expenses related to our Patent Monetization efforts were$40,303 , or 16% of the total general, administrative and selling expenses, and general, administrative and selling expenses related to our Andrea DSP Microphone and Audio Software Technology were$208,314 , or 84% of total general, administrative and selling expenses. General, administrative and selling expenses increased approximately 1% to$524,833 for the six months endedJune 30, 2021 from$521,089 for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , general, administrative and selling expenses related to our Patent Monetization efforts were$81,518 , or 16% of the total general, administrative and selling expenses, and general, administrative and selling expenses related to our Andrea DSP Microphone and Audio Software Technology were$443,315 , or 84% of total general, administrative and selling expenses. These small decreases relate to changes in regular operating expenses. Interest expense, net
Interest expense, net for the three months endedJune 30, 2021 was$18,642 compared to$16,429 for the three months endedJune 30, 2020 . Interest expense, net for the six months endedJune 30, 2021 was$36,141 compared to$33,896 for the six months endedJune 30, 2020 . The change in this line item was attributable to an increase in interest expense because of a higher amount of debt outstanding combined with a decrease of interest income related to lower cash balances. Provision for Income Taxes
The income tax provision for the three months endedJune 30, 2021 was$297 compared to a$59 tax provision for the three months endedJune 30, 2020 . The income tax provision for the six months endedJune 30, 2021 was$585 compared to$565 for the six months endedJune 30, 2020 . The provision for the three and six months endedJune 30, 2021 and 2020 is a result of certain licensing revenues that are subject to withholding of income tax as mandated by the foreign jurisdiction in which the revenues are earned. 20 Net loss
Net loss for the three months endedJune 30, 2021 was$158,511 compared to a net loss of$242,457 for the three months endedJune 30, 2020 . Net loss for the six months endedJune 30, 2021 was$162,434 compared to a net loss of$438,718 for the six months endedJune 30, 2020 . The net loss for the three and six months endedJune 30, 2021 and 2020 principally reflects the factors described above.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Liquidity And Capital Resources
AtJune 30, 2021 , we had cash of$369,507 compared with$362,730 atDecember 31, 2020 . The increase in our cash balance atJune 30, 2021 was primarily the result of proceeds of the PPP Loan Second Draw largely offset by cash used in operating activities. Our working capital balance atJune 30, 2021 was$299,467 compared to working capital of$321,491 atDecember 31, 2020 . The decrease in working capital reflects an increase in total current liabilities of$139,710 offset by an increase in total current assets of$117,686 . The increase in total current assets reflects an increase in cash of$6,777 , an increase in accounts receivable of$24,866 , an increase in inventories of$118,607 and a decrease in prepaid expenses and other current assets of$32,564 . The increase in total current liabilities reflects an increase in trade accounts payable and other current liabilities of$140,917 partially offset by a decrease in the current portion of long term debt of$1,207 . The increase in cash of$6,777 reflects$227,880 of net cash used in operating activities,$8,120 of net cash used in investing activities and$242,777 of net cash provided by financing activities. The cash used in operating activities of$227,880 , excluding non-cash charges for the six months endedJune 30, 2021 , was attributable to a$25,451 decrease in accounts receivable, a$143,039 increase in inventories, a$32,564 decrease in prepaid expenses and other current assets and a$119,223 increase in trade accounts payable and other current liabilities and lease liabilities payable. The changes in accounts receivable, inventories, prepaid expenses and other current assets and trade accounts payable and other current liabilities and lease liabilities payable primarily reflect differences in the timing related to both the payments for and the acquisition of inventory as well as for other services in connection with ongoing efforts related to Andrea's various product lines including continuing efforts to pursue patent monetization. The cash used in investing activities of$8,120 reflects an increase in patents and trademarks of$2,609 and purchases of property and equipment of$5,511 . The increase in patents and trademarks reflects capital expenditures associated with our intellectual property. The increase in property and equipment is associated with the purchases of computer equipment. The increase in patents and trademarks reflects capital expenditures associated with our intellectual property.
The cash provided by financing activities of
We plan to improve our cash flows by aggressively pursuing monetization of our patents related to ourAndrea DSP Microphone Audio Software , increasing the sales of our Andrea DSP Microphone Audio Software Products through the introduction of new products as well as our increased sales and marketing efforts. As ofAugust 10, 2021 , Andrea had approximately$300,000 of cash deposits. For discussion regarding management's evaluation of our ability to meet our obligations as they come due in coming months, see the section titled "Liquidity" in Note 1, Basis of Presentation, of the notes to unaudited condensed consolidated interim financial statements. We cannot provide assurances that demand will continue for any of our products, including future products related to our Andrea DSP Microphone andAudio Software technologies, or, that if such demand does exist, that we will be able to obtain the necessary working capital to increase production and provide marketing resources to meet such demand on favorable terms, or at all.
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